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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Effective interest
An investor has the choice between two investments. Investment Exe offers interest of 4% per year compounded semi-annually for a period of three years. Investment Wye offers one interest payment of 20% at the end of its four-year life.
What is the annual effective interest rate offered by the two investments?
Sir I got Investment Exe correct but I fail to understand how to get investment wye
The no of times paid for exe is zero per year but at the end of the year they get the interest payment so I don’t know how many times they pay for a year and whether to divide the interest by a certain no of years or not either
Investment Y just makes on interest payment of 20% at the end of 4 years.
Therefore, if the effective annual rate is X then (1+X)^4 = 1.20.
So 1 + X = fourth root of 1.20 = 1.0466
X = 0.0466 or 4.66%
Sir how did you assume X to be the effective interest
I thought that
X=(1 +i/n)^n-1
but you assumed that ‘i ‘is ‘X’ instead in your calculation
I’m a bit confused to why you rearranged the equation like that sir
Use ‘I’ instead of ‘X’ if you want – what symbol you use is irrelevant.
What I wrote before is correct in that 4.66% per year is equivalent to 20% at the end of 4 years.
I have no idea what your ‘formula’ is.